Journal of Economics and Sustainable Development
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.6, No.7, 2015
www.iiste.org
Institutional Credit and Agricultural Production:
An Empirical Evidence from Pakistan
Alamgir Khan*
Department of Applied Economics, Institute of Management Sciences
1-A, Sector E-5, Phase VII, Hayatabad, Peshawar, Pakistan
Email: [email protected]
Muhammad Fawad Azam
Department of Applied Economics, Institute of Management Sciences
1-A, Sector E-5, Phase VII, Hayatabad, Peshawar, Pakistan
Email: [email protected]
Waqas Qamar
Department of Applied Economics, Institute of Management Sciences
1-A, Sector E-5, Phase VII, Hayatabad, Peshawar, Pakistan
Email: [email protected]
Abstract
In our prevalent and deprived agrarian sector, sufficient credit provision is a serious problem to implant
technological advancements and achieve technical efficiency, moreover to hire efficient inputs to improve and
rise agriculture output/income collectively and alleviate poverty eventually. In the middle of embroiled informal
credit sector and recent increase in banking services in last decade shrink the attention to intend the formal
sector’s optimum potential. In this perspective, this study is going to explore the relationship of agriculture credit
on agriculture output. We analyzes the role of institutional credit on agricultural production using the time series
data for the period of 1970 to 2008 and to give suggestions and recommendations about the promotion of
institutional credit in agriculture sector of Pakistan. Cobb-Douglas production function is estimated using simple
OLS, and all the variables are transformed to per cultivated hectare. Results show that agricultural credit,
availability of water, cropping intensity and agricultural labor force has significant positive impact on
agricultural production. The study recommend that institutional credit should be provided by the concerned
organizations in order to boost agricultural output. The credit provision should be made to ensure the
contribution of agriculture sector in economic development of the economy.
Keywords: Agricultural Production, Institutional credit, Pakistan
1.1 INTRODUCTION
Agriculture is essential to economic growth and development in Pakistan. It has been considering as the
backbone for economy of Pakistan since its independence (1947). It is still contributing around 21% to GDP and
43.7% to total employment. Besides contributing 43.7% in labor force, 66% of the population of Pakistan
residing in non-urban places, depending upon agriculture sector for their income directly or indirectly. Different
kinds of crops are cultivated here in Pakistan which includes food crops like wheat, rice, sugarcane, cotton and
maize and beside this some cash crops i.e. cotton, sugarcane, tobacco etc. The agriculture sector also provides
raw material to the agro based industry of Pakistan and play a vital role in the exports of the country. Where 64%
of exports are basically based on agricultural raw materials. So any plan modify for agriculture market will
impact the economic system and a hug section in the population in the country (Economic survey of Pakistan,
2013-14).
Any development in agriculture sector will directly influence the improvement of the socioeconomic
life of the rural populations. The Government of Pakistan is aware of the vitality of agriculture credit and
making all efforts for promotion and development of agriculture finance in the country. Resultantly, the flow of
credit to agriculture sector is showing improvement and all steps have been taken to the credit availability to the
farming community at affordable rates in order to advance agriculture production, A well-established linkage of
loaning institutions is working to come across the financial requirements of farmers particularly in the rural parts
of the entire country. Currently, 31 commercial, Islamic and microfinance banks with around 3,900 agriculture
designated branches are facilitating farmers by extending agriculture credit throughout the country. These
include 19 commercial banks, 2 specialized banks, 3 Islamic banks and 7 microfinance banks. These banks
provide production and developmental loans to farmers for agricultural activities including crops production,
poultry, livestock, orchards forestry, fisheries, nurseries etc. State Bank of Pakistan, keeping in vie the increasing
demand of credit has provisionally set an indicative agriculture credit disbursement target of Rs 380.0 billion
during 2013-14 as against Rs 231.0 billion fixed last year. Out of which Rs 188.0 billion is allocated to 5 major
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Journal of Economics and Sustainable Development
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.6, No.7, 2015
www.iiste.org
Commercial Banks as a group, Rs. 69.5 billion to Zarai Taraqiati Bank Limited (ZTBL), while Rs 90.4 billion to
fourteen domestic private banks (14 DPBs), also Rs. 21.6 billion to seven Microfinance Banks (7 MFBs) and Rs.
10.0 billion to Punjab Provincial Cooperative Bank Limited (PPCBL) and at the last 0.5 billion were targeted to
3 Islamic Banks. (Report of SBP, Micro Finance, 2013-14).
1.2 STATEMENT OF THE PROBLEM:
Agriculture sector of Pakistan is confronting many challenges in form of the shortage of energy and water, along
with rising prices of inputs like seeds, pesticides, fertilizers, etc. Most of the time small farmers are facing
difficult situations which make them unable to continue their farming. In order to continue they are always in
need of credit for the purchase of seeds fertilizers and others agricultural inputs. This credit is whichever arises
from farmer’s savings or barrowings. In less developed countries like Pakistan, there is no chance to save money
by the farmer’s (specially small farmers) so thats why farmers borrow money from lenders. There are two types
of lenders one is formal which include ZTBL, commercial banks, micro finance banks and Islamic banks
provides short term, medium term and long term agricultural loans to farmers. The informal lender consist of
lending money from relative, friends, village shopkeepers, commission agents etc. Most of the time theirs terms
and conditions are so stick in order to lend credit for agricultural purpose.
The present study is aimed to check and analyze the impact of institutional credit on agricultural
production and to present their contribution towards agriculture growth in the economy.
1.3 OBJECTIVE OF THE STUDY
The present study is aimed:
1. To analyze the role of institutional credit on agricultural production in Pakistan.
2. To check the relation of agricultural credit on agricultural production in the economy.
1.4 SIGNIFICANCE OF THE STUDY
Every sort of business where capital is an important part of its operation always require credit such as agriculture
sector also need agricultural loans in order to increase the productivity of the sector as well as to bring significant
improvement in the welfare and standard of the farming community of the country. But these always exist a
problem of the lack of availability of resources mainly credit for the farmers so there exist a gap between their
income and required expenditure of the farming sector for the fulfillment of that sector effectively there is need
of such sources which provide loans for the farmers which mostly consist of institutional sources as they have
formed and well stabilized framework for the provision of such kind of loans. Pakistan agriculture sector almost
fulfill the food demand of the country by own production in order to fulfill the country demand for food and all
agricultural products there is always need of agricultural credit to boost this sector. Beside this agricultural loans
also helps in the development of farmer’s individual life standard too. Which alternatively brings improvements
and technological advancement in the production side of the sector. As a result technically efficient production
side will produce more and more output as well as the profit.
2.1 THEORETICAL FRAMEWORK OF THE STUDY
This section consist of following main sections.
2.2 AGRICULTURE CREDIT
It is the credit or loan given to the farmers for the purpose to fulfill the needs of the agriculture sector, or it is the
funds available to the farmers for the development of their agricultural sector is called agricultural loans or credit.
2.3 CLASSIFICATION OF AGRICULTURAL CREDIT
Agricultural credit can be classified into 3 types in term vise, these are short term credit, medium term credit and
long term credit.
2.3.1 SHORT TERM CREDIT
These credit consist of the duration of one year of time period or below it these credit usually given to meet the
daily routine type needs of the farmers for example purchasing seeds fertilizer pesticides etc. also these loans are
utilized by farmers in order to meet their consumption needs tell the harvesting season short term credits mostly
uses as a portion of working capital.
2.3.2 MEDIUM TERM CREDIT
This period consist from 1 year to 5 years these loans are provided for the purchase of livestock, construction
and improvement and advancement in the water canals and for others agricultural equipment’s these loans are
given by specialized banks and other financial institutions here the farmers should pledge his all type of property.
2.3.3 LONG TERM CREDIT
Long term credit vary from more than five years these loans are given in order to develop and improve the
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Journal of Economics and Sustainable Development
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.6, No.7, 2015
www.iiste.org
sinking of the wells as well as tube wells recovery and purchase of extra land and repayment of farmer’s credit
as well as the purchase of tractors agricultural machinery harvesters . On the other hand it also use for the
purpose to start poultry and dairy farms and at the end it helps in the development of agro-based industries these
loans may be used in productive and unproductive purposes.
2.4 SOURCES OF AGRICULTURE CREDIT
There are basically two types of agricultural loans for farmers these are Institutional sources of credit and noninstitutional sources of credit. Institutional credit are those credit which are provided by the institutions like
ZTBL the commercial banks provincial governments cooperative and micro finance banks along with Islamic
banks for agriculture development. These loans are provided after its specified procedure and concerned terms
and conditions. By non-institutional credit mostly comprise of loans taken from friend’s relative money lender
“arthiys and others commission agents. These loans have no proper documentation or others rule and regulations
that’s why most of the time farmers facing a tough time while getting these loans. The interest charges against
such loans are also higher as compare to others.
Concluding theoretical frame work the study conclude that there are always a need of agricultural
credit specially taken from institutions rather than non-institutional sources.
3. LITERATURE REVIEW
As a sector agriculture highly depend upon credit as compare to any other sector in whole economy, the reason is
due to the seasonal variations in the income as well as the shifting development to commercial farming from
subsistence farming. Therefore agricultural loan will indeed offer them opportunity to increase their return and
as a result it will also improve their living standard.(Vogt 1978). In Pakistan it is not so easy for small farmers
to be stay for a longer period with the agricultural sector, because they are always in need of the fulfillment of
their required credit for the purchase of agricultural inputs for their production but unfortunately only large land
holders get and receive large portion of these loans because of the influences. That’s why the small farmers
couldn’t get the loans which latterly create a negative impact on their agricultural development as well as social
welfare, on the other hand due to higher prices of most of the agricultural inputs these small farmers are not able
to save money for that reason to be stay in this sector they need agricultural credit from others different sources.
( M. Zafar 2011 )
Pakistan agricultural sector mostly consist of subsistence farmers who can’t afford to use high quality
seeds fertilizers in order to improve their productivities, because of lack of availability of finance it is then
influence the per acre productivity of agriculture sector of the country. In order to increase agricultural output
there is always a need of proper and efficient availability of finance and credit facilities to the farming
community in their concerned regions. (Ahmad, 2007). Specifying the role of agricultural credit on wheat
production Arif conduct a study in 2001 which contain the micro credit disbursement by ZTBL on agricultural
output. His study was conducted in three villages of district Attock in which he was analyzing the effect of
agricultural credit on wheat production as well as all those factors which make hurdles for getting loans from
ZTBL, the study shows that all the respondents properly used the loans to purchase agricultural inputs which
bring a significant increase in cropping intensity as well as a marvels increase was also observed in the
production of wheat. As in concluding his study states that agricultural credit bring a positive impact on wheat
production. (Arif 2001). By observing agricultural credit impacts, Waqar calculated that because of proper
utilization of agricultural credit the income and saving of the respondents increased as the increased in monthly
income was observed to be 73% along with and upward trend was observed in the opportunities of employment
in those targeted areas beside all these there was observed a positive impact on living standard of those targeted
beneficiaries of the agricultural loans. (Waqar 2002).
From the above studies we conclude that agricultural credit has a significant effect on the agricultural
productivity. The present study will attempt to address the role of institutional credit on agricultural production
and to find out its contribution towards agriculture sector and its development.
4.1 METHODOLOGY
4.1.1 Data Description
The current study used time series (secondary data) collected from various publications of ZTBL and
Government of Pakistan from 1970 to 2008 about the agricultural output, agricultural loans, water availability
and labor force in agricultural sector. Area of the study include whole agriculture sector of Pakistan.
4.1.2 Model Specification:
In this study, we used multiple regression model as it transformed all variables into per cultivated hectare. logical
relation of the independent variables are such that agricultural production is affected by the main factors such as
available water, labor forces and if we include agriculture credit then we can easily check its impact or role in the
increasing productivity of the wheat production.
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Journal of Economics and Sustainable Development
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.6, No.7, 2015
www.iiste.org
Estimated equation of cobb-Douglas production is as followed
LGDPA = α 0 α 1LINCA α LALF αLAWA  αDUMMY + U
Where
Dependent Variable (LGDPA) = Natural logarithm of agricultural output per cultivated hectare.
Independent Variables are,
LINCA = Natural logarithm of agricultural credit per cultivated hectare.
LALF = Natural logarithm of agricultural labor force per cultivated hectare.
LAWA = Natural logarithm of farm gate availability of water per cultivated hectare.
DUMMY = for bad years (1- for years 1974-75, 1983-84, 1992-93 and 2000-01, other wise 0 )
4.1.3 Cobb -Douglas production estimation by using OLS
The given table shows that the final model is free from multicollinearity, heteroscedasticity and autocorrelation.
The data was stationary at the second difference where test statistic value was greater than critical values at 1%,
5% and 10%. Result shows that agricultural production is influence by all the explanatory variables in the model.
R2 value shows that 96% of the total variations in the agricultural production are explained by independents
variables. All the variables are significant and according to expectations. Agricultural credit is positively related
to agricultural production and explores the thing that one percent increase in institutional credit will increase
agricultural production by sixteen percent. Dummy variable is significantly negatively related to agricultural
production, which shows that uncertainties like droughts; floods etc. will decrease agricultural output.
Table: 1 Cobb-Douglas production estimation by using OLS
Variables
Coefficients Estimates
Constant
6.01**
LINCA
0.16**
LALF
0.64*
LAWA
1.10**
DUMMY
-0.067**
AR(1)
0.255*
MA(1)
0.979*
Source: OLS result
R2= 0.96F=160.1 Durbin-Watson Statistics=1.96
*=99% Significance level
**= 95% Significance level
5. MAJOR FINDINGS OF THE STUDY
Following are the major findings derived from the study.
a) The institutional credit have a positive role in the increase of agriculture output.
b) The institutional credit in agriculture sector reduced the problems of the farmers regard financing and
improve their level of production.
c) In 2008-09 agriculture disbursement was at peak.
d) The percentage ratio of the small farmers towards advancing agriculture credit from commercial banks is
higher than the medium and large farmers.
e) There is a massive increase in the advancement of institutional credit in agriculture sector of Pakistan since
1994-95.
f) Agriculture credit is positively related to agriculture production in Pakistan.
g) One percent increase in institutional credit will bring increase of 16% increase in agriculture production in
Pakistan.
h) The increase in agriculture production will lead to also support the agro based industry of Pakistan and also
increase the export of Pakistan.
6. CONCLUSIONS
Institutional credit disbursement shows an increasing trend during some past years. In 2007-08, credit
disbursement was at its peak. ZTBL and Commercial banks add up to major share in formal agricultural credit
disbursement. From 2000-01, commercial banks heighten their loan portfolio for agriculture sector. Increase in
development and production loan portfolio from the entire formal institutions give boost to agricultural output.
Agricultural credit was positively significant to agricultural GDP while, availability of water, crop intensity,
agricultural labor force per cultivated hectare were the factors that enhance agricultural GDP.
7. POLICY RECOMMENDATIONS
It is recommended to enlarge the agricultural credit disbursement particularly to small farmers. To take into
custody the uncertainty in agriculture sector, crop insurance scheme must be initiated. This may be helpful in
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Journal of Economics and Sustainable Development
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.6, No.7, 2015
www.iiste.org
getting required recovery rates of agricultural loans. Agricultural credit given to farmers on the basis of
productivity will help in targeting the needy persons and this will also shrink the loan losses. Because when
productivity of such a farmer increases, then by selling agricultural output, he will be able to return the loan
easily. In the bad times, share of consumption loans should be increased. Besides, relaxation of collateral for
small loans will be helpful for poor farmers. Above and other similar options for agricultural credit will be
helpful in removing rural poverty.
REFRENCES
Ahmad M. 2007 The effects of AKRSP’s micro-credit programme on agriculture and enterprise development in
district Astore Northen areas implication for poverty alleviation. M.sc (Hons) Thesis, Deptt. of Agric. Econ.
Agric. Univ. Peshawar, Pakistan.
Arif, 2001. Effect of micro credit disbursed by ADBP on agricultural production in District Attock. Instt. Dev.
Studies, Faculty of Rural Social Sci., NWFP Agric. Univ. Peshawar, Pakistan.
Shaukat Masood Zafar, Rural Credit in Pakistan and role of ZTBL, By Technology Times at July 17, (2011)
Vogt, D. 1978. Broadening to access credit. Development Digest, 16(3).
Waqar, M. 2002. Effects of SRSPs micro-enterprise development programme on income and employment.Thesis
of M.Sc (Hons) Agric. Univ. Peshawar, Pakistan.
Appendix:
AGRICULTURE CREDIT DISBURSEMENT IN PAKISTAN FROM 1970-71 TO 2007-08
Explanation of the given figure. The figure expresses the disbursement of agriculture credit in Pakistan from the
period 1970-71 to 2007-08 in this bar chart. It give a clear view of all the institution credits in agriculture sector
the chart easily explain the impressive increase in these credit from 1994-95 and onward . The data is taken from
Economic survey of Pakistan (various issues).
Figure: 1 Agriculture credit disbursement in Pakistan during 1970-71 to 2007-08
Institutional credit as percentage to agricultural GDP 1970-2008
The given figure below shows, the situation of institutional credit as percentage to agricultural gross domestic
product (GDP) for the period of 1970-71 to 2008. Institutional credit as percentage to gross domestic product
was at its highest point during 1986-87. After this period, there is a decreasing trend in this percentage. This ratio
is somewhat at a better condition during 2006-07 but again in 2007-08 institutional credit as percentage to gross
domestic product declines.
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Journal of Economics and Sustainable Development
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.6, No.7, 2015
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Figure: 2 Institutional credit as percentage to agricultural GDP 1970-2008
Sources:Economic Survey of Pakistan 2003-04, 2008-09.
Agricultural Development Bank of Pakistan.
Agricultural Statistics of Pakistan 2004-05
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